Vitaliy N. Katsenelson, CFA, is a portfolio manager/director of research at Investment Management Associates in Denver, Colo. He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007). To receive Vitaliy’s future articles by email send a blank email to ...

China Region Leads New Category Rollout

When we decide whether a category should be created, we look for three things. First, we look for performance that's different from the existing categories. Second, we look for a measurable difference in portfolios. Third, we look for a critical mass of at least 20 funds--you'd be amazed how many fund types go from trendy to dumpster in a few years.

With that in mind, we have created three categories that meet those tests.

China RegionInvestors continue to show more interest in playing the biggest emerging markets. There are 25 open-end and 17 ETFs in this new category. We define it as funds with at least 75% of their equity assets in China, Taiwan, and Hong Kong. As the group has grown, a number of approaches to regional exposure have been applied, and we captured most by including any of the three markets that are seen as plays on China.

The category boasts two funds with more than $1 billion: Matthews China MCHFX and Fidelity China Region FHKCX. The Matthews fund and Templeton China World TCWAX and U.S. Global Investors China Region USCOX each have managers with more than a decade at the helm. Fidelity China Region is the cheapest with an expense ratio of 1.03%. Matthews China has the best 10-year return, but don't expect anyone to repeat their 17% annualized 10-year return.

Market NeutralWe're carving our long-short group into two by pulling out the market neutral funds from those that can have more varied long-short exposure. Market neutral portfolios seek income while maintaining low correlation to fluctuations in market conditions. Market neutral portfolios typically have net equity exposure between negative 20% and 20% and a beta between negative 0.3 and 0.3. All told there are 29 open-end market neutral funds and no ETFs.

The group has five funds with more than $1 billion: Arbitrage ARBFX, GMO Alpha Only III GGHEX, Merger MERFX, Highbridge Statistical Market Neutral HSKAX, and JPMorgan Research Market Neutral JPMNX. James Market Neutral JAMNX and JPMorgan Research Market Neutral each have managers with at least a decade of experience. A different JP Morgan fund, JPMorgan Multi-Cap Market Neutral OGNAX has the cheapest retail expense ratio at 1.49%.